Moelis & Company's (MC) CEO Kenneth Moelis on Q1 2016 Results - Earnings Call Transcript

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Moelis & Company (NYSE:MC)

Q1 2016 Earnings Conference Call

April 27, 2016 05:00 PM ET

Executives

Michele Miyakawa - Head, IR

Kenneth Moelis - Chairman and CEO

Joseph Simon - CFO

Analysts

Ken Worthington - JP Morgan

Ashley Serrao - Credit Suisse

Devin Ryan - JMP Securities

Brennan Hawken - UBS

Daniel Paris - Goldman Sachs

Betsy Graseck - Morgan Stanley

James Mitchell - Buckingham Research Group

Vincent Hung - Autonomous

Operator

Good afternoon and welcome to the Moelis & Company First Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Michele Miyakawa, Head of Investor Relations.

Michele Miyakawa

Great, thank you. Good afternoon thanks for joining us today for Moelis & Company’s first quarter 2016 financial results conference call. With me today are Ken Moelis, Chairman and CEO and Joe Simon, Chief Financial Officer.

Before we begin, I’d like to note that the remarks made on this call may contain certain forward-looking statements which are subject to various risks and uncertainties including those identified from time-to-time in the Risk Factors section of Moelis & Company’s filings with the SEC. Actual results could differ materially from those currently anticipated.

Our comments today include references to certain adjusted pro forma or non-GAAP financial measures. We believe these measures when presented together with comparable GAAP measures are useful to investors to compare results across several periods and to better understand our operating results.

The reconciliation of these adjusted pro forma financial measures with the relevant GAAP financial information and other information required by Reg G is provided in the firm’s earnings release, which can be found on our Investor Relations website at investors.moelis.com.

I will now turn the call over to Ken.

Kenneth Moelis

Thanks, Michele and good afternoon, everyone. I am pleased to report that we delivered our strongest first quarter revenues to-date of $126 million, up 27% from the first quarter last year. On today’s call Joe will give additional color around our results and then I’ll provide my thoughts on the market and how our firm is positioned.

Joseph Simon

Thanks, Ken. I’ll review revenues, compensation and non-compensation expenses, the strength of our balance sheet and our continued commitment to return capital. We reported a record first quarter of $126 million of revenues, up 27% from the prior year quarter. Our performance compares favorably to the overall M&A market in which the number of global M&A completions greater than $100 million declined 23% year-over-year.

We’re encouraged by our M&A revenue growth for the quarter, which deserves a few observations. Despite market volatility during January and February our M&A completions were strong. Sector breadth continues to be a key attribute of our revenue production and our average fee earned per transaction increased. We also participated in ongoing restructuring activity and while completions were down for the quarter we’re experiencing higher activity as the number of mandates increased resulting in higher level of retainers. In fact consistent with what Ken mentioned on our last earnings call the number of restructuring mandates on which we worked was more than double the number in the prior year period.

Moving to compensation, our first quarter comp expense ratio was 58%, which is in line with our target and compares with 54.2% in the first quarter of ‘15. The increased compensation ratio is attributable to the additional tranche of equity awarded in early ‘16 as well as the modified vesting terms associated with that equity. As a reminder we expensed all new hires through the P&L. Last month we bolstered our energy team in Houston with an additional MD hire who will join in July to advise mid-steam oil and gas companies and master limited partnership.

We also continue to focus on promoting from within and hiring to strengthen our sector expertise and global presence. In the first quarter we promoted three advisory professional to Managing Director, one in Brazil, one in India and one in the U.S. covering aerospace and defense. Our adjusted pro forma non-comp expense ratio decreased from 22.7% to 18% for the first quarter of ‘16 driven by higher revenues.

As discussed last quarter we expect full year 2015 non-comp expenses to be a reasonable full year proxy for 2016 absent the impact of any substantial hiring. There is modest seasonality to our incurrence of non-comp expenses with quarter one typically at the lower end of the quarterly average or quarter four as typically at the higher end.

Income from equity method investments was $2.1 million for the first quarter of ‘16, which compress with $2.9 million for the prior year period. As previously mentioned, the majority of income in this line item results from an equity interest obtained as part of an advisory assignment. We do not anticipate a meaningful contribution from this interest going forward.

Our adjusted pro forma presentation assumes that all partnership units have been converted to shares. So that all the firm’s income is presented as if tax as a corporation at a current corporate effective rate of 39.5%, which compares with the prior year’s tax rate of 40%. Resulting adjusted net income for the first quarter of ‘16 was $0.35 per share as compared with $0.28 in the prior year period.

Lastly, we ended the quarter with a strong financial position with $139 million of cash and short-term investments and no debt. On April 21st, our Board declared a quarterly dividend of $0.30 per share consistent with previous quarters to be paid on June 3rd to stockholders of record as of May 20th.

I will now turn it back to Ken.

Kenneth Moelis

Thanks, Joe. I will spend a few minutes on the current market environment and our outlook before opening it up for questions. We believe companies will continue to see growth in cost savings through M&A given the slower GDP growth and deflationary environment. Our M&A dialog remains healthy and the desire for interesting ideas and creative solutions for companies is the highest I have witnessed in a while, in fact I have never been more confident the strength of our strategy, the quality of our latent and the resonance of our brand and vision as a trusted advisor in corporate board rooms.

However, it’s important to note that during the first quarter we really did witness what amounted to an air pocket in M&A across Wall Street. M&A announcements were down significantly given market volatility and the sharp widening of credit spreads in January and February, as well as the increased level of government and political risk to transactions as both antitrust and tax authorities become more aggressive in their stands on deals. Since the first quarter, the market has recovered and credit markets are probably passed half way back to their mid-2015 levels, but the political and regulatory overhang has really not dissipated.

Given the slow pace of announced deals in the first quarter and the time to completion for both restructuring and M&A closings, we may witness a scenario similar last year where growth for the year will be back half weighted. However, we have significant momentum behind us and continue to see the global organic build of our business yield exceptional results.

We continue to make important investments around the world that position us to grow market share and revenues. We are capitalizing on China’s increased appetite for outbound M&A as they look for growth in the west. In the past month alone we have been involved in four deals in China, we advised XIO Group on its $1.1 billion acquisition of J.D. Power, we advised AssetMark on its $780 million sale to Huatai Securities and just last week we advised a Chinese investor Consortium on its $3.6 billion acquisition of Lexmark, which was the third largest U.S. public takeover ever done by a Chinese investor.

We enter China five years ago and are well positioned to capture share in the region, but more importantly this follows similar patterns of organic builds in other regions like the Middle East where I think we have the best investment banking franchise in the region and now Brazil where we are seeing increased activity, having recently advised on a nice buy site in the region and we are also currently advising the bond holders of Oi the largest telecom operator in Brazil with over $15 billion in debt.

Additionally, with over 100 managing directors around the world across numerous sectors and armed with M&A and restructuring expertise we are well position to grow as a result of our revenue diversity. We were affirm founded in the financial crisis and intentionally built a resilient model that’s well positioned to outperform even in volatile markets.

Again we are differentiated and our intense focus on return on invested capital which allows us to both invest in growing our firm, while returning a significant amount of capital to our shareholders. Since our IPO approximately two years ago including today’s dividend announcement. We have returned $3.80 a share or 15% of our IPO price back to our shareholders. And at the same time, we have invested in our business by organically increasing our MD headcount from 86 to 103 and growing our revenues by 24%. These are the metrics that we think are important and that we can control overtime, and we believe we can continue to replicate them going forward.

I’ll now welcome any questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Ken Worthington of JP Morgan.

Ken Worthington

Hi, good afternoon. First really interested in the restructuring business, it seems pretty consensus at this point that the restructuring business is getting and will continue to get more active and your comments continue to suggest that strengthening is taking place. So as CEO and maybe based on sort of the idiosyncrasies of Moelis where your bankers have a lot of flexibility to pursue kind of advisory and restructuring. How do you further take advantage of opportunities or the improving outlook to capitalize on restructuring? Should we start to think that the either number of restructuring focus bankers will increase, do you kind of continue to focus on sector or hiring within sectors or promoting within sectors where restructuring seems more likely? Or do you kind of do nothing the business runs itself the bankers are smart they automatically adapt and you get the focus on other strategic initiatives outside of this?

Kenneth Moelis

That’s a good wish that last part of the question. Look Ken a couple of things, our model is interesting for two reasons one is we have a subjective bonus for one P&L and we actually reward people for doing the things that our clients need. And therefore we can actually motivate people to participate in sectors which are growing like restructuring. Secondly, we have a very large restructuring team. During the M&A boom and the downturn of restructuring I think we were asked that many times and we used to say yeah, we’re maintaining the whole team. We don’t know when it will hit, but we know we can move quick enough to hire the team. So we’re going to keep them it’s a good investment, they were doing fine by the way. But we know that when we the restructuring cycle hits it’s fast and it goes quickly you can’t replace the talent.

So we have a very deep restructuring team. I think we have the best team on Wall Street. We have bankers who are in place, and then what we have done and even watching it a little bit through our announcements. We do things like as we’ve added banking expertise in places like energy and just to give you a flavor, I believe we’re now and I’ll just I think I can say this we are I am going to say this and so I hope we can say it. We are 19 restructuring in the energy field. That’s from a position of a couple of years ago where I said we were trying to develop a better banking presence.

So that’s yes, in energy I think we did hire bankers into position to take advantage of our unique expertise and restructuring. I don’t think you’ll see us hire significantly into the restructuring probably that’s not to say no blunt, but we have a really full team and an excellent team on the ground. And then we just going to direct our bankers in the industries where it’s relevant to be aware of what’s going on.

And lastly let me say one other thing, I think M&A and the rest of the business there is a lot of talk about restructuring. What I actually think as of today, the M&A marketplace is as active and as we’re as busy as we’ve been in the M&A environment as well. So it’s now like we can -- we have a lot of spare capacity to move people. Let’s just say this I think we’re busy in both sectors.

Ken Worthington

Great position to be in. Thank you very much.

Operator

And our next question will come from Ashley Serrao of Credit Suisse.

Ashley Serrao

Good afternoon, Ken. As you continue to grow the firm how are you thinking about hiring this year and can you also remind us where the MD count currently stands post all the promotions and hires?

Kenneth Moelis

I believe our MD count as of today is 103 managing directors by the way just to bring you up to speak to today. Look I think some of that hiring the people missed we actually did our biggest hiring during the crisis. So I think there is two aspects is who you are hiring and how are you hiring them? What are the inherent risks you’re undertaking? How is that process going? How good is the talent and what is the commitments you have to make?

So I think this year will be close to our average year over the last two or three years I think it will be high-single-digit MDs. But I think where you’ll see us being very careful on how we hire people, I think there is a lot of turmoil going on in the large banks I think there is a lot of opportunity for boutiques and I think to how is one of the interesting things that people don’t as much as the number.

Ashley Serrao

Okay. And then on the international front can you just talk about the halo or branding effect a spree of transactions in region like China brings and what are the sort of the incremental opportunities that come from doing a bunch of deals in China?

Kenneth Moelis

Look brand is a -- brand helps and when you have momentum in the region and literally prior to getting on this phone call I happen to see my partner Eric Cantor walk in with a suitcase fresh from a trip to China right off the airplane where we held a conference on [indiscernible] and how to approach it, and had a significant turnout for things like that and in a young market like China I think you can brand yourself and being in for deals, and being there with some leading expertise in the space by the way is very concerning to them.

We have four managing directors in the region; we’ve been there for a while. Again you might not have noticed that because we had to run those expenses through our income statement as we organically build it for four years and now we’re taking advantage of it this is the benefit of running a clean org, a clean institution in which you hire, expense and train your own talent and I think that it does build on itself and that’s what we’re seeing.

Ashley Serrao

Okay, thank you for taking my questions.

Operator

And the next question will come from Devin Ryan of JMP Securities.

Devin Ryan

Hey, thanks good afternoon. Maybe a follow-up here on restructuring appreciate the additional contexts you guys provided clearly good to hear a busy horn and good for revenues. With financial conditions easing a bit over the past several months are you still seeing an acceleration in activity there or do we need to see activities still on the other sectors to see kind of that list of mandates continue to actually grow from here versus just executing what you have and kind of stay constant?

Kenneth Moelis

I think it’s going to continue to grow. Remember the levels at which you’re talking about materials, prices or energy prices, if we didn’t take a short trip down into low 30s you would think this was a very distress level of oil, let’s say oil price relative to the debt levels in the companies are out there. So yes there has been a recovery, but it’s still at a price that’s going to cause many companies to have to focus on restructuring their balance sheet and the same in the commodities part of the cycle, and we’re starting to see it in other parts of the consumer areas like retail. So I believe that we’ll continue to accelerate.

Devin Ryan

Okay, great. That’s helpful. And then just with respect to the financial sponsor community it seemed that they were maybe starting to get a little more excited about the market with the valuation pullback earlier in the quarter with the improvement how are your clients feeling about kind of participating in M&A cycle? I mean has the dynamic changed between whether it’s sponsors looking at deal or strategic? And just along those lines financing markets a story that continued in 1Q or just a tight market, but didn’t seem impact your announcements too much, I’m just curious on an update on what you guys are seeing in financial as well?

Kenneth Moelis

Yeah the financing market is a part I think the stock market has rebounded 95%, 99% of the way back to where it was. And the credit markets are a little slower the spreads are still wide, there is still caution in the market, deals are still being more diligent on covenants and structure. So it’s a little different in the middle market, it’s a little slower on the comeback. I think one of the things we’re seeing that when I said I’m as confident as I’ve ever been is I think the mix of our business and we are always strong in financial sponsors, but I think have a statistics to back this up. And my sense of the business is our dialog with strategics has never been stronger.

And we’re finding interesting in volatile times like this, where actually we’re a resilient organization I think we’ve defined ourselves by helping companies solve problems. And I know that sounds minor, but I think there is a difference to just approaching companies on their M&A issues, but really being around them when they have other things and other issues. And our expertise throughout the system and the global nature of the firm.

And so I just think we’re finding ourselves in more and more situations where strategics need help. And I think they like having us as one firm being able to put three, four, five managing directors around them and help themselves a complex problem. And that’s why I feel so confident about where we’re positioned right now.

Devin Ryan

Got it, okay great. And then just last question here, comp ratio essentially now at that 58% level that you guys were targeting. I mean how should we think about the inputs that maybe drive movement from here. Meaning what would drive upward pressure overtime, what would drive any downward pressure. And to the extent the backdrop actually improves as we get into a better part of the M&A cycle. Is that 58% still the right level or is there may be room for improvement? Just trying to think through is that just the right balance between your employees and shareholders even in the better M&A backdrop?

Joseph Simon

Yeah so I think that overall the 58% level is the appropriate level certainly for the short and probably intermediate time period. I think that how we’ve looked at it and how we have come to the conclusion that that is a fair balance between employees and investors.

Kenneth Moelis

If we had a substantially improved market I think we’ve always said this prior range of a point we’d look at. But something happened this year, remember we took our five year -- our amortization to five year equal from backend. So inside that 50 is -- 58 is actually an increased amortization scheduled in the early year.

Joseph Simon

Yeah we talked about this last quarter. The impact is actually fairly significant to the amortization expense component and it will be substantial both this year and next as we kind of adapt that new schedule. So I think it would be unrealistic to think that we’re going to be able to kind of come off of that 50% for at least a couple of years.

Kenneth Moelis

Another way to saying that I think if we use the old amortization schedule, yeah we’d be at a lower number right now. So it’s just some pressure from that but not going to allow us to come below 58%.

Devin Ryan

Right understood yeah no I understood the dynamic, I was just more curious kind of bigger picture. But appreciate it very much, thanks for taking my questions.

Operator

And the next question comes from Brennan Hawken of UBS.

Brennan Hawken

Yeah, good afternoon. Thanks for taking the question. So a quick follow-up on that. So we had you guys laid out the change in the RSUs last quarter’s call. And I think then you had indicated that it was a switch from the prior schedule where the vest or the pro rata vest in years three, four and five. So basically does that mean that as we think about the comp ratio in 2015 to 2016 then we should think about another corresponding component of upward pressure similar for next year as a few years ago prior RSUs begin to amortize.

Joseph Simon

Yeah I think that's probably a good way of thinking about it. I think again what we talked about last quarter and it remains true is that year one contribution to that amortization is 46% of the grant value in year one versus last -- the old the former schedule which was 26%. Obviously the 26% is the kind of constant for the first three years based on that grade at vesting, 46% will go to probably 26% in the second year. But that schedule ultimately in the next -- in this year and next year is going to put significant -- is going to be substantial in terms of the equity amortization component.

Kenneth Moelis

But to be clear we are committed to 58%, we are just as somebody asked can we bring it down while we are committed to 58% even with the additional pressure additional amortization.

Brennan Hawken

Okay, all right. Thanks for clarifying that. And another follow-up here, on the hiring point Ken I think you had said a couple of times that you currently stranded at 103 MDs does that include the hire that was made in Houston I don’t think that that person has formally started so I would assume not, but just want to clarify? And you also made a comment about that the how is as important as the number when you were taking about the hiring and may be could you just expand on that, because it maybe a long day I might be a bit sick, but I just don’t follow.

Kenneth Moelis

Well first of all that hire in Houston is not in the 103, that person joins in June. So that will hit in this quarter. The how is people are just you’re seeing a best pipeline I can see as larger pipeline as I want if I would have put a number on the table that would be uneconomic for us in terms of guarantees, method of payment remember when I say how it’s how much commitment do you have to make to a person, how much do you underwrite the future, what’s the number how much unvested lead behind do you peak up?

And when I mean how I do think there is a lot of people talk about a volume of people and et cetera, but what comes down at the free cash flows line the reason we have been able to return $3.80 to you as of counting this dividend and also grow the business, remember we have no debt, this is all self-generated capital that is growing the business 26% of revenue and returning that much capital is because we are very focused on the commitments we are making, the capital invested and that is capital when you we don’t build plants, but we do make commitments to people and those are risks and rewards that you have to balance going forward. So it’s a long answer, but it really is how much capital did you put up to obtain the upside and the -- of the banker that you are about to get.

Brennan Hawken

No, I appreciate the extensive answer for sure. And then last one from me, Ken I think you had indicated that you expect given some of the dynamics in financing markets which you spoke about at length last quarter as well would be backend weighted in prior years where you have talked about the potential for blackened weighted, you were willing to give an indication about the fact that there would still be revenue growth do you have enough visibility into your pipeline and what you guys are actively working on now to make a commitment as to whether or not you are going to see revenue growth in 2016 and how we should think about that?

Kenneth Moelis

I am not going to give guidance. The last year the first quarter I think we were I have to say we were newly public and we felt like we should probably give a little guidance because we had a quarter that we felt we wanted to let you know what we felt. We don’t want to guidance it’s too tough it’s too volatile, but I will say this again, I’ve never felt better about this firm’s position in the world the clients we are dealing with and the value we are delivering and the number and the quality of the conversations we are having with -- and really the acceptance of the model where you deliver the whole firm I think over time as people get used to dealing with boutiques they are going to like that more and more.

I think they are going to realize that getting the ability to tapping of three, four, five expert, managing directors because of the one from profit model is really a place where you get a lot of return out of your company’s investment in the relationship. So that’s a long answer to no, I am not going to give guidance and get trapped into that for the rest of my life in a business that you can only look silly so many times.

Brennan Hawken

Fair enough, thanks for the color.

Operator

And our next question comes from Daniel Paris of Goldman Sachs.

Daniel Paris

Hey, good afternoon. Ken you mentioned that M&A dialog feels very healthy, but curious what impact the market volatility has had CEO confidence and general risk appetite? I guess the question I am getting at does this feel like other periods of choppiness in the market that have quickly rebounded or is there a risk that takes corporates a while to kind of pull the trigger after this period that we have seen here?

Kenneth Moelis

Look as you remember my call on the fourth quarter I was pretty -- I try to give a warning that if that volatility stayed where it was we’d have a problem. It was short, it was sharp and outside of credit spreads still by the way the credit spreads are still different than they were. So that’s having an impact. But I think corporates are back and looking and how they can improve their business. It’s a very low growth environment out there, they still have to look at M&A as a way to either take out cost or increase growth.

And maybe we’ll have some pressure on some of the larger deals because of the aggressiveness of both the C&I trust focus and the inversion focus. And I know there have been people who said, it’s not going to have that bigger deal. In my mind, it’s a little bit like a story about the dog that doesn’t bark. Just curious the dog didn’t bark doesn’t mean something didn’t happen. And meaning that the deal that didn’t happen is hard to point to. But I think there are deals that probably won’t happen as a result of that it’s just that no one will know about them.

Daniel Paris

Yeah that was actually my follow-up question to your point around the anti trust environment. Is there anything particular you think driving that or is it just the consequence of couple of years of really strong mega cap activity and now that’s picking up or anything you point us to?

Kenneth Moelis

It felt like there was a change, there was a day there in the Midwest where treasury came out and hit inversions and I think it was the same day that DOJ came out on the big energy merger and said they were going to fight it. And those have well you want to admit or not those types of moves by the government and there were governments around the world that are having similar moves in different regions.

And I think it will make a Board, a company, a CEO rightfully think about approaching something like that. In the midst of a highly populist election year, remember I do think there is a lot of information that’s out there in an election year that adds risk to transaction. So I think that all plays a role and it’s there whether you -- again whether can see it or not it’s there.

Daniel Paris

Got it, that makes sense. And maybe just one more from me and kind of piggybacking on that. It sounds like you’re constructive on both M&A and restructuring each have kind of their own risk and opportunities. But if you had to choose which are the two business lines are you more optimistic on in terms of revenue growth call it over the next year or two?

Kenneth Moelis

Let me say this, one of the things is I think I would say I see about 2%, 3%, 4% of the deal environment. So when I say I’m optimistic I’m very optimistic about where Moelis & Company is positioned. It’s really actually hard we all pretend to speak for the other 96% of the market that we don’t see or whatever given our market share. But and I’m very bullish about where we’re positioned on this. If I had to say on revenue growth, I would pick restructuring because where you came off a low base. If you were to ask me where the absolute dollars of growth would come from I think I’d say M&A.

Daniel Paris

Got it, thanks very much for that.

Operator

And our next question comes from Betsy Graseck of Morgan Stanley.

Betsy Graseck

Hi, thanks. Two questions, one on inversions just very big picture question is let’s say to your point anybody who is interested in inversions maybe takes a side bar for a little bit. What percentage of the overall pipeline does that impact for you?

Kenneth Moelis

Well as many of you know we were involved in -- there is a substantial inversion deal. And look, let me say this that’s a very small event for Moelis & Company over the life of a firm. I believe it’s actually a bigger event for U.S. business community and U.S. GDP. And as a whole, I actually think the act -- I look at that and I say the act of riding decrease expose fact to change the law for political goals is a terrible thing. The United States is the most attractive capital market in the world for precisely the reason that we have the most predictable judicial system and ways to undertake an exposure capital to risk.

And it’s amazing what we did in an expose fact those away to on inversions. So I’ll say this, we don’t have a big exposure other than we all have exposure to the quality of our capital markets and that does generate transactions. I actually think it’s a bigger picture than any single transaction that we happen to be involved in.

Betsy Graseck

Okay. And then the second question on the average fees per transaction. I think you mentioned that you’ve got a bit of a higher average fee per transaction recently, maybe give us some color on to the drivers of that? I mean, clearly people would think about more lead left, hire in the group, but I am also wondering about impact of fee structure, pricing [indiscernible], things like that anything you could speak to the -- help us understand what’s going on would be helpful.

Kenneth Moelis

See I’d say it’s more just bigger size transactions. Like I said I think our brand and our vision's resonating more and more with strategics, which tends to be larger transactions. Interestingly I’d have to say that again it’s a gut feel I think our ratchets [ph] were lower than usual.

We’re being very disciplined because we’re busy so we have actually put in place a very disciplined new business review committee structure so that managing our talent and our time has become a top demise that we’ve become very disciplined and what we take on and what we’ll charge for doing that. And I think as I might have said that a few calls ago, but one of the things about the pro-cyclicality of the business is as the street gets busy you generally do have fees expand because the whole street starts to watch their time and effort and has to price up a little bit to get the attention of the better players.

Betsy Graseck

Thanks for that.

Operator

The next question comes from Jim Mitchell of Buckingham Research.

James Mitchell

Hi, good afternoon. Just maybe want to circle back to Europe I guess that’s one area we haven’t talked about that’s the second largest M&A market historically it flagged quite a bit the U.S. and appreciate your improvements in developing markets, but how do you think of Europe what you’re seeing there particularly now that QE [ph] is in place pushing down corporate bond spreads, do you see some opportunity there for growth and how are you positioned for that?

Kenneth Moelis

We’re positioned well in Europe I think we’re close to about 20 managing directors plus or minus and but Europe continues to be very slow, slower than the U.S. in M&A, if I’m optimistic about the back half and really the future two or three years of M&A so far Europe it has not shown up. There is a lot of people come up with rationales and reasons I don’t exactly know why, but Europe is still to me not anywhere as strong as we would like it to be where people thought it might be and I don’t -- I can’t tell you that I see Europe dramatically changing from the slower growth that it’s on right now, slower growth in M&A.

James Mitchell

Even with slow GDP growth and cheap financing it’s just see your confidence isn’t there?

Kenneth Moelis

I wish I had a singular answer to it, again it’s just not -- I think it has some to do with it really isn’t one market. So there are borders to cross, there are regulatory environments, there are things like the budget question I don’t have a real answer as to what is holding it down, but there isn’t the amount of -- if you call it animal spirits apparent in the European market than I think we have here in the U.S.

James Mitchell

Fair enough. And then maybe just as you think about future headcount growth, where do you see maybe your biggest weakness or area you’d like to build further is it just broad based or the particular sectors or regions you’d like to add more?

Kenneth Moelis

It’s somewhat broad based look I think we’re still under staffed in energy for what the opportunity is and we’re heading as I told you with the amount of business we have down there we could -- I think we could accelerate that even further if we have more talent we’re waiting for one managing director to show up in June we talked about. And places like healthcare, general industrial we can always add more, do better. So I’d say it’s broad with again a focus that energy is probably a place, which we had more people we’d be happier.

James Mitchell

Okay, great. Thanks a lot.

Operator

And the next question comes from Vincent Hung of Autonomous.

Vincent Hung

Hi, how is it going?

Kenneth Moelis

Hi, Vincent.

Vincent Hung

So Ken now that you’ve stepped back from some of the day-to-day management responsibility has this allowed you to spend as much time as you’d like in front of clients?

Kenneth Moelis

Yeah so I think I’ve had maybe that’s why I’m as confident as ever but I’ve had as good six months as I’ve ever had and I did know I stepped back and Vincent if you’ve talking to my co-presidents behind my back. I’ve had a -- I think we’re getting a lot more and by the way it’s not just me. I think we took great banker Rick Lehman and really said to him, I mean Rick Lehman is one of the great M&A bankers on the Street and we put him out there and we’re getting enormous benefits out at taking some of the inside management work and giving it to Navid and Jeff and taking some of our most accomplished bankers and putting them in front of clients. So yeah I had -- maybe that’s why I had as much fun in the last six months as I’ve ever had.

Vincent Hung

Okay. And just a question on fund placement business. So in light of the incident with the MD at Park Hales have you seen any noticeable changes in that business day-to-day?

Kenneth Moelis

In the competition over private placements you’re saying?

Vincent Hung

Yeah or more scrutiny from clients what changes in processes.

Kenneth Moelis

No, we went through our processes. And without boring you we have a very let’s put it this way, our bankers cannot generate their own payables it does go through Joe. We can do this in private I just want to say we think it would be difficult for somebody to accomplish what was accomplished, that’s not to say fraud, fraud is always tough to capture. But we did go and run through our processes. Joe you have any?

Joseph Simon

Yeah so we don’t know everything that happened in that event. But what we do know and how we’ve looked at our process. We’ve made some small tweaks, but overall we feel highly comfortable -- we feel very comfortable with our internal control environment. I think the risk of it happening is remote. And even if it did happen, we also have a good fidelity bond insurance policy.

Kenneth Moelis

Lastly Vince there is one some different is the only client money that ever comes to us is the fees to us. We do not transfer money through the firm. I think that was a secondary trade. So substantial amounts of money flowed through, we have no sales trading any funds, so the only funding that should come to us is a fee.

Vincent Hung

Yeah.

Kenneth Moelis

And that’s a difference. So I think it’d be when we can’t disintermediate [ph] money that was meant to go person A to person B.

Vincent Hung

Yeah. I just sort of last question, so can you give us an update on the seasoning of MDs. And I’m looking for the color around the hires that you made in the last two year? And how that would split out between the external hires and the promotes?

Kenneth Moelis

Yeah let me see if I can put it. So right now we have about 10% of our MDs in their first year and 15% in their first to second year. So about 25%, a little under 25% of our managing directors have been here two years or less. As that helps to generalize it. But we feel very good about them by the way. I think we talked about this when we were going public. We feel like having a public tradable instrument would improve our ability to hire highly talented managing directors and we think it has.

Vincent Hung

Great, thank you.

Operator

And this concludes our question-and-answer session. And I would like to turn the conference back over to Ken Moelis for any closing remarks.

Kenneth Moelis

Well thank you for spending the time with us this afternoon. As you know if you have any additional questions you call Margo [ph] or Mitchell and we look forward to speaking with all of you soon. Thank you.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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